Educational Articles

Coverage Initiation: Kinder Morgan, Inc.

Paul E. Debbas, CFA
| December 03, 2012

Value Line has initiated coverage of Kinder Morgan, Inc. (KMI) in its flagship product, The Value Line Investment Survey. Kinder Morgan is the largest midstream energy company in North America, with the leading domestic position in natural gas pipeline and storage, with more than 62,000 miles of pipelines in the United States; independent transportation of petroleum products; operation of liquids and dry bulk terminals; and transportation and marketing of carbon dioxide. The company has more than 11,000 employees.

To avoid any confusion, investors need to be aware that there are two other publicly traded issues with the Kinder Morgan name: Kinder Morgan Energy Partners, L.P. (KMP), which is already covered in The Value Line Investment Survey, and Kinder Morgan Management, LLC (KMR). Kinder Morgan owns the general partner and limited partner interests in Kinder Morgan Energy Partners and El Paso Pipeline Partners, L.P. (EPB), which it acquired in May of 2012. (Kinder Morgan Energy Partners had to sell some assets in the Rocky Mountain region in order to comply with Federal Trade Commission requirements.) El Paso Pipeline Partners is also covered in The Value Line Investment Survey. Kinder Morgan Management’s only significant assets are the partnership units it owns in Kinder Morgan Energy Partners. Over time, KMI expects to transfer most of its assets to Kinder Morgan Energy Partners and El Paso Pipeline Partners.

Kinder Morgan Energy Partners was the first company with the Kinder Morgan name, having been founded in February of 1997 by Richard Kinder and William Morgan. (Mr. Morgan is no longer involved in the company.) After Mr. Kinder took over KN Energy, a gas pipeline company, in 1999, KN Energy became Kinder Morgan, Inc. In August of 2006, Mr. Kinder led a deal that took KMI private in a management buyout that closed in May of 2007. KMI reemerged as a publicly traded entity in an initial public offering in February of 2011.

Kinder Morgan should appeal to investors that want management to have a lot of “skin in the game”. It calls itself a company run by shareholders, for shareholders. Indeed, Mr. Kinder owns about 24% of KMI; including other members of management and original stockholders, the ownership interest is 30%. Mr. Kinder’s salary is $1 a year, and he gets no bonuses, stock options, or restricted stock.

Kinder Morgan shares also have some appeal for income-oriented investors, with a dividend yield that is nearly twice the market average. What’s more, the board of directors frequently raises the payout, having done so three times (so far) in 2012.

Kinder Morgan is benefiting from the rising demand for natural gas. Prices are less than half of what they were in 2008. This has led many electric utilities to lessen their use of coal-fired generating assets in favor of gas-fired plants. Also, increasingly stringent environmental regulations for coal-fired facilities have prompted some utilities to close older, less efficient units. Kinder Morgan’s five-year capital budget includes about $11 billion for growth projects.

About 85% of KMI’s cash flow comes from fee-based businesses. The remainder is related to oil production, and the company’s price exposure is substantially hedged through 2015. This means that the volatility of natural gas prices is of little near-term concern. However, KMI does face risks associated with oil production, regulation, the environment, and interest rates. If natural gas prices rise to a level that dampens demand, that would hurt the company, as well.

For a more thorough look at KMI’s business prospects, and the particular investment merits of its stock, subscribers should examine our full report in The Value Line Investment Survey.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.